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Are My Student Loans Hurting My Credit Utilization Ratio?

Louis DeNicola

Louis is a personal finance writer who works with Fortune 500 financial services firms, FinTech startups, and non-profits to help promote financial literacy. He covers a variety of personal finance topics and especially likes...

Your credit utilization ratio is one of the most important factors in determining your credit score. And it’s easy to understand why. If you’re constantly maxing out your credit cards and loading up on debt, new lenders will see you as a greater risk than somebody who always leaves himself plenty of financial breathing room.

As you’ll learn, your student loans may not impact your utilization ratio. However, understanding how credit utilization works could help you manage and build or repair your credit.

A utilization rate is a comparison of two numbers, your current balance and your available credit limit.

Utilization rates are only calculated on revolving accounts, such as credit cards and lines of credit.

The utilization rate of each revolving account on your credit report can affect your credit score.

However, your overall utilization rate (your total available balance versus your total available credit limit) is more important in determining your credit score than the utilization rate of one account.

For example, imagine you have two credit cards that each have $1,000 credit limits and one card has a $500 balance.

One card has a 50% utilization rate because the $500 balance is half of the card’s $1,000 credit limit.

The other card has a 0% utilization rate because it doesn’t have a balance.

Your overall utilization rate is 25% because you’re using $500 of your overall $2,000 in available credit.

Some people advise trying to keep your overall utilization rate below 30% or below 10%, and these can be helpful rules of thumb. However, there’s isn’t a specific point when the utilization rate turns from bad to good. Simply put, having a lower utilization rate (both on individual accounts and, more importantly, overall) is better for your credit score.

Also, here’s a helpful trick if you make a lot of purchases on your credit card but pay off the balance in full each month: Make early payments to lower your card’s balance.

Many credit card issuers report your balance to the credit bureaus around the time they send you your monthly statement, which is often a few weeks before your bill is due. The reported balance goes into the utilization rate calculation, and a high balance could lead to a high utilization rate even if you pay your bill in full.

By making payments on your credit card account before the end of your statement period, you can reduce the balance that gets reported to the credit bureaus and winds up on your credit reports. This can lower your utilization rate while still letting you earn lots of credit card rewards.

Installment debt vs. revolving debt

There are two types of credit accounts: installment accounts and revolving accounts.

Installment debt: Personal loans, auto loans, mortgages and student loans are common examples of installment loans. With an installment debt, you often receive your full loan amount up front and then pay off the loan with regular payments over a fixed period of time. Once you pay off the debt, the account is closed.

Revolving debt: Credit cards and lines of credit are two common types of revolving credit accounts. With a revolving debt, you can borrow against your accounts, pay off the loan and then borrow again without having to reapply. For example, you can use your credit card for purchases, pay off the balance and continue using your credit card indefinitely. Often, you can make a minimum payment and revolve or carry over the remainder of your balance to the next month.

Utilization rates are only calculated on revolving credit accounts.

Why student loans may not affect your utilization rate

By now, you may be able to figure out why a student loan may not affect your utilization rate — because it’s an installment loan not a revolving debt.

Student loans could still have an indirect impact on your utilization rate, though. If you’re struggling to make student loan payments, you might not be able to afford to fully pay off your revolving credit accounts each month. As a result, you’ll could wind up carrying a balance and your utilization rate could increase.

While utilization rates are one of the most important credit scoring factors, your payment history can be even more important. If you think you might not be able to afford an upcoming student loan payment, contact your loan servicer right away to learn about your options.

You may be able to change your repayment plan or consolidate your federal student loans to potentially lower your monthly payment amount. Or, if you’re dealing with a hardship, such as a lost job or medical emergency, the servicer might be able to temporarily pause your payments and let you skip payments without affecting your credit score.

These options could wind up costing you more money in the long run, as interest often continues to accrue while you’re making lower payments or skipping payments. However, it may be a good option if you’re trying to manage your overall financial situation and avoid hurting your credit while dealing with your student loans.